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Home » Accounting, Basic Accounting » Basic Accounting: Debit and C redit – Double Entry System
By Putra | 13 Comments | Putra is a CPA, formerly a controller for a corporation in Costa Mesa, CALast
updated: Saturday, July 19, 2008
I know many of you have been
requesting for some posts to cover
basic accounting for dummies topic, so
here I am coming with the very basic
accounting post. Learning accounting
could be a significant monetary cost if
you take accounting course for sure.
Don’t worry, that is not the purpose of
this site. Learning basic accounting here
is considered as “at—zero—charge”,
except that you are going to charge
yourself for patience, time and effort.
On this posting, I am going to introduce you the very basic “debit and credit
known as double entry accounting system”. It means you are just about to
learn: what account is, how the debit, credit, and balance are made and what
the rule of those are, what chart account is and why it is needed, and very
basic of trial balance.
Preparing a new equation A = L + C after each transaction w ould be cumbersome
and costly, especially w hen there are a great many transactions in an accounting
period. Also, information for a specific item such as cash w ould be lost as
successive transactions w ere recorded. This information could be obtained by
going back and summarizing the transactions, but that w ould be very time-
consuming. Let’s start the lesson w ith the account…
The Account
An account may be defined as a record of the increases, decreases, and balances
in an individual item of asset, liability, capital, income (revenue), or expense.
The simplest form of the account is know n as the “T” account because it resembles
the letter “T.” The account has three parts:
1. The name of the account and the account number
2. The debit side (left side)
3. The credit side (right side)
The increases are entered on one side, the decreases on the other. The balance
(the excess of the total of one side over the total of the other) is inserted near the
last figure on the side w ith the larger amount.
Debits and Credits
W hen an amount is entered on the left side of an account, it is a debit, and the
account is said to be debited. When an amount is entered on the right side, it is a
credit, and the account is said to be credited. The abbreviations for debit and
credit are Dr. and Cr.
W hether an increase in a given item is credited or debited depends on the
category of the item. By convention, asset and expense increases are recorded as
debits, w hereas liability, capital, and income increases are recorded as credits.
Asset and expenses decreases are recorded as credits, whereas liability, capital,
and income decreases are recorded as debits.
Here are the basic debit and credit rule:
An account has a debit balance w hen the sum of its debits exceeds the sum of its
credits; it has a credit balance w hen the sum of the credits is the greater. In
double-entry accounting, w hich is in almost universal use, there are equal debit
and credit entries for every transaction. W here only two accounts are affected, the
debit and credit amounts are equal. If more than two accounts are affected, the
total of the debit entries must equal the total of the credit entries.
For further lesson, then you need to know w hat transaction is grouped as an
asset, expense, liabilities, capital and income/revenue. If you have enough
time you may w ant to follow my other post in various topic about accounting,
financial and taxation.
The Ledger
The complete set of accounts for a business entry is called a ledger. It is the
“reference book” of the accounting system and is used to classify and summarize
transactions and to prepare data for financial statements. It is also a valuable
source of information for managerial purposes, giving, for example, the amount of
sales for the period or the cash balance at the end of the period.
The Chart of Accounts
It is desirable to establish a systematic method of identifying and locating each
account in the ledger. The chart of accounts, sometimes called the code of
accounts, is a listing
of the accounts by title and numerical description. In some companies, the chart of
accounts may run to hundreds of items.
In designing a numbering structure for the accounts, it is important to provide
adequate flexibility to permit expansion w ithout having to revise the basic system.
Generally, blocks of numbers are assigned to various groups of accounts, such as
assets, liabilities, and so on. There are various systems of coding, depending on
the needs and desires of the company.
The Trial Balance
As every transaction results in an equal amount of debits and credits in the ledger,
the total of all debit entries in the ledger should equal the total of all credit entries.
At the end of the accounting period, we check this equality by preparing a tw o-
column schedule called a trial balance, w hich compares the total of all debit
balances w ith the total of all credit balances. The procedure is as follow s:
1. List account titles in numerical order.
2. Record balances of each account, entering debit balances in the left column
and credit balances in the right column.
3. Add the columns and record the totals.
4. Compare the totals. They must be the same.
5. If the totals agree, the trial balance is in balance, indicating that debits and
credits are equal for the hundreds or thousands of transactions entered in
the ledger. While the trial balance provides arithmetic proof of the accuracy
of the records, it does not provide theoretical proof.
For instant:
If the purchase of equipment w as incorrectly charged to Expense, the trial balance
columns may agree, but theoretically the accounts would be w rong, as Expense
w ould be overstated and Equipment understated.
In addition to providing proof of arithmetic accuracy in accounts, the trial balance
facilitates the preparation of the periodic financial statements. Generally, the trial
balance comprises the first tw o columns of a w orksheet, from w hich financial
statements are prepared (I will post the w orksheet procedure later in another
other post)
Summary:
To classify and summarize a single item of an account group, w e use a form called
an “Account“. The accounts make up a record called a “Ledger“. The left side of
the account is know n as the “Debit“, w hile the right side of the account is know n
as the “Credit“. Expenses are debited because they decrease “Capital“. The
as the “Credit“. Expenses are debited because they decrease “Capital“. The
schedule show ing the balance of each account at the end of the period is know n
as the “Trial Balance“.
